The Role of Pakistans National Culture in Adopting Corporate Governance

To Sir Wasim Abbas By Muhammad Amir Bajwa CRN: SP11-MBA-06

Corporate Governance

Dissertation submitted for the Management Sciences Department COMSATS Institute of Information Technology Vehari, Campus.

28-MAY- 2012

COMSATS institute of information technology, Vehari campus.

Purpose: The purpose of this term paper is to explore the relationship between (national) culture and corporate governance, arguing that the former in fact contest latter. Where effort over control between various classes and social blocs are played out and does effect in adopting the good or bad corporate governance. Using secondary materialpart meeting debates and the texts of important intellectual debates on culture and corporate governance during this period showed the different ways in which Pakistani culture was defined at the same time, their ultimate impact on adopting the Corporate Governance in Pakistan. Keywords: National culture, Corporate Governance.

Introduction: National culture consists of cultural languages, religion, ethnic and national identity, cultural history, customs, education, economic conditions and political arrangements, and of course business practices (Wikipedia). Business practices refers to the methods, procedures, processes, or rules employed or followed by a company in the pursuit of its objectives which. (Business dictionary). Organizational culture consists of the cooperative behavior of human being that is part of an organization, it is also formed by the organizational values, mental perception, custom, working language, systems, and symbols, and it includes beliefs and habits. Organizational culture affects the way people and groups interact with each other, with customers, and with stakeholders (Wikipedia). Organizations by defining the right behavior for various situations may have "own unique culture", in larger organizations, there is a diverse and sometimes conflicting culture that coexists due to different characteristics of the management team (Ravasi and Schultz 2006). Organizations are faced with a high degree of uncertainty when attempting to move towards sustainability and if organizations set aside its objectives such as paying no attention on privileges of shareholders, stakeholders, taking no pain in fulfilling social responsibility, gives no investor protection, and especially when inside its internal environment does not oversight on

the matters of Transparency, Fairness, Dignity, Reliability, Loyalty, Stewardship and Uprightness, then there exists unethical business practices which definitely results in fear of agency cost, losses, lost of its public trust, loss of its competitive edge and finally companies needs to be shutdown. In this regards Corporate Governance which implies the representation to stakeholders provides the decision making and leadership, and accountability which monitor and evaluate performance, needs to be very important in order to save the organizations from above mentioned situations (Corporate Governance Practices 2012). Most of the organizations culture reflects and represents the true picture of its national culture of its country may have also a great impact in adopting the good or bad corporate governance for that particular country. Background/History (Literature Review): Within each of the management disciplines assumes that each nation has a unique, significant, and describable culture which have a greater impact on its cultural history, customs, education, economics, politics, and organizational practices (Hickson and Pugh declare1995: 90). Culture is the combination of tradition and customs collective and individual behavior during peace and war. It is the collective way of life in a society. With special regards to Pakistans national culture, in its present shape notably Islamic but it has been influenced by various cultures of the Sub-Continent to a great extent. That is why it is different than the other culture of Islamic countries (Aurangzeb 2006). Pakistan being a poor country considered inadequate in providing the facilities of basic necessities of life such as electricity, health, education, and non basic facilities such as industries and infrastructure while on the other hand Pakistan has made great progress when compared with the situation at the time of its initiation in 1947. (Ali et al 2006) Regardless of cultural differences in terms of different cultural characteristics, languages, and diverse geography, all Pakistanis share a common national culture due to the spiritual attachment, historical relations does impact on corporate culture and hampered the adoption of corporate governance (Mughal 2006).

A diverse chronological condition has given rise to a diverse cultural and ethnic scenario of Pakistani society. From urbanization to civilization and socialization, national culture of Pakistan at every step of its turning has influenced much in the adoption of corporate governance due to the cultural disparities taken from its heritage (Qadeer 2006). The Role of Pakistans National Culture in adopting Corporate Governance (Conceptual Framework): (Aguilera, OConnell and Froese 2010) in their dissertation demonstrated that corporate governance ratings vary significantly across countries. Based on findings from a study of 1,341 firms in 23 countries over the period 2003-2008, result shows that national culture of egoism, ambiguity prevention and belief are associated with variation at firm-level in adoption of corporate governance. In this term paper, with special reference to the Pakistans national culture model, examines the relationship between culture and corporate governance verbally and develops hypotheses concerning corporate control, investors, organizational objectives, and protection of minority share holders, company boards, aggressive invasions, which are as a main attributes of corporate governance systems, and their developments in relation to the Pakistans national culture dimensions and find empirical support for testing the impact of Pakistans national culture in adoption of Corporate Governance. This can be represented in the Empirically Tested Corporate Governance in Pakistans national culture perspective model below. Figure: Political arrangements
Business Practices

Social Equality

D Pakistans National culture

Does not support

Corporate Governance.

Civil or military regimes

Economic Conditions

Hypothesis: H: Pakistans national culture has much influence (Does not support) in adoption of good Corporate Governance.

Methodology: After the development of hypothesis this paper uses the societal negated arguments taken from the secondary sources such as published journals, manuscripts, thesis and articles to examine the Pakistans national culture role in adoption of corporate governance environment. Based on socio-cultural characteristics, the dissertation paints a true picture on essential fundamentals of cultural dimentions, and their relevance for supportive or non supportive traits in adoption of corporate governance.

Results: The above mentioned hypothesis of this theory when tested in the context of concepts and previous studies showed that to simply transplant a system of corporate governance in Pakistan is not radically supported by the current national culture and from the inception days of Pakistan came into being. Pakistani corporate sector had tried a lot to reach where the developed nations are today, but in spite of its best efforts it failed to reach that level of Transparency, Fairness, Dignity, Reliability, Loyalty, Stewardship and Uprightness due to non supportive cultural dimensions. Unfortunately, no modifications to this approach can be made within the broad revision of the traditional concept of culture. The diagnosis of cultural differentiation, multi collectivity, and radical individuality do not allow the corporate governance to be prosperous, it seen as blurrier, more porous or even non-existent. Precisely this is the greatest flaw in recent coherence. (Mahwesh 2006)

Findings and Analysis (Reasons for non supportive) : In this section of the thesis it is founded and analyzed that certain major causes of failure of good corporate governance in Pakistan, in the perspective of Pakistans National cultures non supportive dimensions are due to these reasons which are discussed below as,

1) Political Arrangements: By the late 1990s, reports from the World Bank and the IMF urged that the entire world would fare better if other states/corporations/institutions adopted the techniques of Anglo American corporate governance. Though Pakistan and other countries much paid tribute to the theory and politics, This system proved their failure to prevent or detect dishonest, disloyal and irresponsible behavior in political system and also in organizations. 2) Business practices: The major causes of failure of a good corporate governance system in Pakistan is due to unethical business practices such as non regulation by the monitoring authorities and corruption, lack of ethical issues (Transparency, Fairness, Dignity, Reliability, Loyalty, Stewardship and Uprightness)

3) Social in equality: Social inequality refers to a situation in which individual groups in a society do not have equal social status, voting rights, freedom of speech and assembly, access to education, health care, job satisfaction, and access to credit. All these traits of social in equality are found in Pakistans national culture, causes failure of corporate Governance. 4) Civil or Military Regimes: The world community, through its collective wisdom, has learnt to uphold the basic and fundamental human and socio-political right of the people to vote for and elect the representatives of their own choice. Military dictatorships have been put on the defensive by the democratic movements encouraged by the incremental achievements in their neighboring democratic countries. Pakistan too has experienced a transformation from civil to military regimes, which always discouraged the corporate governance. 5) Economic conditions: Pakistan economic environment is affected by intensification of war on terror and deepening of the global financial crisis. Despite support from the IMF and other bilateral and multilateral donors, Pakistan external account remains exposed to a host of uncertainties. Such type of uncertainties resulted in unemployment and high rate of inflation which is hampering the adoption of corporate governance.

Recommendations/ Suggestions: To be able to attain the objectives of good corporate governance in the context of national culture following recommendations will be helpful these are,

1) National culture should be organized in such a way that if it is tested than it strengths the systems and eradicating the sources of weaknesses. 2) Corporate governance systems mesh well with the existent corporate and institutional systems 3) The rules of fairness, openness, accounting standards, accountability and compliance reporting should be practiced in the organizations. 4) Other significant items which may be relevant to a full appreciation of the business, national culture and corporate governance. 5) Hence a good corporate governance framework should be developed to regulate best practices that will enhance the efficiency of the corporate sector, will help to protect the stakeholders interests and gives rise to a vibrant, healthy business culture. Conclusion: Corporate governance is the mechanism by which the agency problems of corporation stakeholders, including the shareholders, creditors, management, employees, consumers and the public at large are framed and sought to be resolved. Corporate governance is an inevitable phenomenon of corporate businesses, whether it is good or bad is determined by the performance of the components and countrys national culture and is very much influenced by it. Good corporate governance is being promoted in almost all parts of the world. Corporate governance is at the evolutionary stage in developing countries like Pakistan. However that does not mean that poor corporate governance is not present in the developed world. With cases such as the Enron bankruptcy, it is quite evident that corporate governance mal-practices are presents everywhere. Major issues in corporate governance are Ethical dilemmas, Window Dressing, Board Composition, and interaction with minority shareholders. The following of corporate governance principles is not that common in Pakistan and it is still ignored by companies because the market is not aware of it. But the short benefits should not be given more importance than long term benefits that Corporate Governance brings with it. If a company wants to establish a long term loyalty base relationship with stakeholders than there is no other way but to adopt good Corporate Governance ideals by keeping in mind the national culture perspective.

References:

www.http//wiki.answers.com/Q/What_is_the_definition_for_national_culture.

http://www.businessdictionary.com/definition/business-practice.html Inter-Asia Cultural Studies, Volume 6, Number 3, 2005 http://www.scribd.com/doc/19968309/ National-Culture-for-Pakistan# http://en.wikipedia.org/wiki/Organizational_culture Qadeer, A. M (2006). Social and Cultural Transformation in a Muslim Nation. Book Review, ISBN (5) p 336 http://en.wikipedia.org/wiki/Social_inequality http://www.defence.pk/forums/national-political-issues/58704-view-civil-militaryrelations-pakistan.html http://www.scribd.com/doc/30524941/Corporate-Governance-in-Pakistan# http://www.scribd.com/doc/19255599/Current-Economic-Situation-of-Pakistan Charkham, P. J. (1992) Corporate Governance: Lessons from Abroad European Business Journal 1992 UNDP (2002), National anti-corruption strategy 2002. Retrieved on May 17, 2010 from http://www.undppc.org.fj/userfiles/file/Pakistan National Anti-Corruption Strategy.pdf.